Gold Leaps Into Backwardation

[GRG55]

Re: how much could you make?

my simple translation:


if there's a rush to physical, expect the backwardation to get more severe. a gold bar in hand will be worth a lot more than the promise of one in a few months. ultimately, backwardation- if it persists- means that people are increasingly distrustful of the paper market.

"...the february gold contract has been in backwardation. This means that one could make a profit by simultaneously selling a gold bar and buying a February contract. One would still have one’s gold plus a little extra."

yes, provided there is a gold bar to deliver in february. backwardation is a vote of no confidence in the futures market's ability actually to deliver when the time comes.

If this is indeed a rush to physical one would expect the backwardation to be the result of rising spot prices (that's what usually happens in the oil market, with which I am more familiar). Instead spot prices have been falling the past month or two. Perhaps an expectation of a strengthening US Dollar and weakening future demand for gold (more sellers in the out months compared to sellers of spot physical gold today) is an alternate explanation?

[Polish_Silver]

Re: Fekete wrong?

I share your confusion on that front.

Something that might be said for it, though, is that the debtors generally borrow to make an investment of some kind. And the rate of return on these investments is also rendered lower by the lower interest rate. So the debt service position of the debtor is not improved, it's kept stable. And meanwhile the principle just sits there looking twice as big and twice as hard to pay off.

Nothing goes wrong for as long as the debts can be piled up continually, for as long as the creditor tolerates this. When the creditor is anyone other than the Fed, this is obviously not for very long. When it is the Fed on the other hand... I'm not sure if he's just wrong or I'm missing something.

NCR,

I think it all depends what the borrowed money was used for. If it bought a house, then lower rates would pump up the houses market price, and make it easier to repay the principal.

However, suppose you borrowed money to expand a steel mill, and all the other steel companies did the same thing. The steel price decreases and your profitability goes down, making the debt harder to repay. I think this process, relating to agricultural output, was a root cause of the great depression.

So Feketes "iron law of debt" might be accurate in some situations, but not others.

(not that I approve of lower rates---they are one of the root causes of our current problems)

[Polish_Silver]

Re: how much could you make?

I agree with that reasoning. It's hard to make a case for "shortage" when the spot price has been going down.

But what if there comes a time, when spot price has been rising, and backwardation occurs?

[NCR85]

Re: Fekete wrong?

NCR,

I think it all depends what the borrowed money was used for. If it bought a house, then lower rates would pump up the houses market price, and make it easier to repay the principal.

By selling the house to a greater fool maybe.

It only works for as long as the housing bubble is kept going then. The ratio of rent to house price will rise. So you can't repay the principle by renting out your property. And that in the long run suppresses its price again. That's one of the conduits via which the housing bubble deflates. In the long run, it doesn't work.

[jk]

Re: how much could you make?

If this is indeed a rush to physical one would expect the backwardation to be the result of rising spot prices (that's what usually happens in the oil market, with which I am more familiar). Instead spot prices have been falling the past month or two. Perhaps an expectation of a strengthening US Dollar and weakening future demand for gold (more sellers in the out months compared to sellers of spot physical gold today) is an alternate explanation?

good point. another way to look at it then, is not that there's a "rush" to physical, but that physical holders are holding and maybe buying more, paper players are selling to follow the downtrend.

[sishya]

Re: how much could you make?

I don't believe there is any Gold backwardation as of now.
Sometime the immediate next month(Feb) Gold future may go below spot price, which I think it is only
because the paper Gold holders are just selling it at once to roll over to successive months.

No backwardation as of yet. I was commenting on the high stock to flow ratio of Gold. The next higher number for stock/flow maybe real estate.

Don't know about US Treasuries.

[coolhand]

Re: how much could you make?

If this is indeed a rush to physical one would expect the backwardation to be the result of rising spot prices (that's what usually happens in the oil market, with which I am more familiar). Instead spot prices have been falling the past month or two. Perhaps an expectation of a strengthening US Dollar and weakening future demand for gold (more sellers in the out months compared to sellers of spot physical gold today) is an alternate explanation?

Hey guys-

Fekete's point in a nutshell is that when gold ceases bidding for dollars, the dollar is done. Sustained gold backwardation only occurs when holders of physical gold won't sell to make a riskless profit because they are more afraid of getting their bullion back than they are making a riskless profit.

Given the physical market tightness I am hearing about nationwide, including in NYC (I am hearing physical markets are the tightest in at least 10 years), this backwardation may be telling us something very, very sinister.

As far as what the COMEX price is telling us relative to this backwardation, it's almost irrelevant in a paper market where paper over-rides physical 100x to 1. Right now, I am having a hard time buying physical at $1600. If gold goes to $10 & I can't get it, what does the paper COMEX price matter?

When you combine April backwardation with Sinclair's comments that hint at a COMEX delivery problem in March, things get interesting.

When you layer on the news that Soros recently sold all his GLD, things get more interesting...did you know that with GLD, if you own 100,000 shares, you can exchange them for physical bullion? Did you know that the last time Soros sold all of his GLD was in 1Q11? Furthermore, per FOFOA (in his "Who's Draining GLD?" post), GLD's bullion holdings fell by 68 tons in 1Q11.

So we know the last time Soros "sold" his GLD, bullion backing GLD fell by 68 tons & the price of bullion rose by 50% in the ensuing 6 months. Hmmm...

Lastly, we know Soros is the man who broke the pound in 1992, & the man who made a billion more shorting the yen just recently. If Soros stands for delivery of so much bullion that he breaks the COMEX, guess what currency he will have just broken? You guessed it, the USD. If the COMEX breaks, the US has no way to manage the price of bullion using massively-levered paper futures. The cash market will price gold.

And the way will be cleared for the Euro/BRIC consortium to re-price gold as the global trade/wealth reserve, which is a price in the $XX,000's.

Food for thought. Gold backwardation may be a very, very big deal. Stay tune.

[thriftyandboringinohio]

Re: how much could you make?

I just checked Kitco and APMEX and see no "out of stock" problems.
Are you trying to buy 400 oz good delivery bars a hundred at a time and finding it tight?

While I agree with you that a true and strong gold backwardation would be awful, I don't see much evidence of it right now.

Years ago I gave up listening to the rumors that COMEX would break, those seem to come around every expiry period for the past ten years.

[BadJuju]

Re: how much could you make?

And the way will be cleared for the Euro/BRIC consortium to re-price gold as the global trade/wealth reserve, which is a price in the $XX,000's.

There's some real geopolitical problems with this speculation about the Eurozone committing to that sort of action. First and foremost, it would be akin to an act of war upon the USA. How do you think the USA would respond to an act of war? Second of all, the USA holds a large amount of European gold. If the Eurozone fired that kind of shot in the currency war, do you not think that the USA would respond just as viciously by seizing European gold?

[metalman]

Re: how much could you make?

Years ago I gave up listening to the rumors that COMEX would break, those seem to come around every expiry period for the past ten years.

used to read max kaiser & jim sinclair & zerohedge & etc but...

hysteria gets old & no $$$ in trading it.

bernanke & co market is chinese water torture.

how to stay sane with the drip, drip, drip day & night?

as a child by trial & error i strived to find the limits of my natural abilities...



in middle age.. nay.. early elderly... i find...






v







v








v









v







v






haven't learned a feckin thing...